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Could Ramsey’s advice help you avoid a huge financial disaster?
Key points
- Dave Ramsey is a finance expert who has provided lots of advice about budgeting.
- He’s warned against making a major home-buying mistake that could destroy your financial security.
- Ramsey believes it can be devastating to purchase more home than you can afford.
No one is immune from financial mistakes, whether they involve missing a credit card payment or accidentally overspending and blowing your budget.
Some mistakes, however, are more serious than others — and can be harder to recover from. Avoiding these big errors is crucial to protecting your stability, but you need to know what they are to protect yourself.
Finance guru Dave Ramsey has identified one of these big mistakes, and has issued a strong warning to his followers about it. In fact, Ramsey described this error as being akin to “dropping an atomic bomb on your finances.”
The big mistake that Dave Ramsey said could ruin your financial life
So, what’s the big mistake that Ramsey has identified and urged people to avoid? It’s buying more house than you can afford.
As Ramsey’s blog explains, taking out a bigger mortgage in order to buy a costlier house than planned is like dropping a bomb on your financial life because the large monthly payments that you’ll end up taking on can destroy your ability to do other important things with your money.
“You’ll wipe out all your other money goals (say goodbye to that vacation you planned),” Ramsey’s blog warns. “You may even struggle to pay bills and put food on the table. That’s not what you want. When life happens, you need some wiggle room in your budget!”
Is stretching to buy a house really so bad?
In warning against buying a home that’s too expensive, Ramsey is spot-on. There are a few big reasons why this mistake is so difficult to recover from.
First and foremost, when you take out a mortgage loan, you commit to paying it for a long time. If you’ve borrowed more than you can comfortably pay back, you’ll be stuck with your high payments for decades. During that entire period of time, you could struggle to cover your costs — causing you a lot of unnecessary stress and leaving you without funds to do important things like build an emergency fund or save for retirement.
If you’ve borrowed more than is comfortable for you, you’ll also be at greater risk of foreclosure. Even a minor interruption in income could make it impossible for you to keep up with your big mortgage bills. And it would be harder to save enough money in an emergency fund to pay for your monthly housing expenses since your emergency fund would need to be much bigger to cover them.
Undoing your error is also difficult because there are huge transaction costs when you sell a home, and it can take a long time to find a buyer. If you regret your purchase, you may not be able to quickly sell your house for enough to pay off your loan and cover closing costs and real estate agent fees.
You don’t want to find yourself stuck with a house that makes it impossible to make your budget work, so be sure to follow Ramsey’s advice: Calculate the amount of house you can comfortably afford and stick to your budget even if your bank is willing to lend you more.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
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